Not reverting to type: Though CAPE mean reverts
Why oh why did I tell Professor Russell Napier that traditionally the speaker at December’s meeting should be brief because he kept STA members from the canapés and drinks at the after-party? The man is quite the maverick and rattled through some really thought provoking ideas and, despite claiming to know nothing about technical analysis, enthralled the audience using some really great charts to illustrate his points.
A Presbyterian Edinburgh-based financier, strategist, and financial historian, plus lots more and he is certainly not the dour Edinburgh Scot – as the glint in his eye for our photo proves and happens to be originally from Northern Ireland! His LinkedIn profile, which I happily copy and paste, reads:
Russell Napier is the Author of “The Solid Ground”, an independently published global Macro investment report. Russell is also a Co-Founder of ERIC (www.eri-c.com) the platform for the sale of individually priced investment research. He was a Consultant Global Macro Strategist with CLSA Asia-Pacific Markets for almost twenty years. In 2013, Russell was elected as a fellow of the CFA Institute of the UK.
Russell founded a course and finance at the Edinburgh Business school, called a practical history of financial markets and is author of the book “Anatomy of the Bear”.
Russell became a limited partner of Cerno Capital and is a member of the Investment Advisory Committee to Cerno’s investment management team. In 2009, Russell was appointed a non-executive director of two UK listed Companies (The Scottish Investment trust, The Mid Mynd international Trust). The same year he joined the Investment Committee of the National Trust for Scotland.
In 2014, Russell Established “The Library Of Mistakes”. The Library is a charitable venture and a first class financial history resource for anyone wishing to learn the lessons of the past as a guide to our financial future. He is also the Keeper of “The Library of Mistakes”.
The essence of his talk was an investigation into what causes change in equity valuations. In his view the bulk of this was down to shifts in inflationary expectations. Scathing about financial media, which according to him prints headlines written by consensus thinking ‘stupid’ people, like a game hunter he has read extensively around the dates of the ‘big five’ US stock market lows: 1921, 1932, 1949, 1982 and (maybe) 2009.
These bottoms are associated with a weak banking system, lack of capital at money centre banks, and emerging market defaults. At market tops equities display the opposite characteristics which are mistaken for a ‘permanency’, often spurred by technology, into what’s labelled ‘the new normal’.
A lovely line of his: ‘Equities are not an asset. They are merely a sliver of hope between assets and liabilities’. He pointed out that in Dickens’ novel A Christmas Carol, Scrooge has a nightmare that his money, like in the post-1837 panic which saw defaults on bonds of the states of Arkansas, Florida, Indiana, famously Louisiana, Michigan, Mississippi and New York, his wealth was tied up in ‘mere American securities’.
He sees deflation now spreading from commodities, other pockets, and anyone linked to the US dollar. Moving on to products more generally, as evidenced by the supermarket wars today, because the money transmission mechanism has broken down. He also thinks that ‘we are wrong about the rate of corporate earnings’ and that if inflation is at or above 4 per cent then equities must come down. The key variable is therefore corporate cash flow. He says: ‘watch the Japanese yen exchange rate as it is a lead indicator’.
Any chance we can invite him back for more?
STA members will be able to access the slides to this fascinating talk in the member’s area.
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